Every real estate investor should be educated on 1031 exchanges, because they have great tax benefits. With a 1031 exchange, you legally avoid paying capital gains tax when you sell a property you no longer wish to own and buy the next within a certain timeframe. Learn the benefits as well as the steps involved in a wise investment strategy.
Benefits of a 1031 Exchange
When you do a 1031 exchange, you take all of your equity forward to acquire the next property. This way you avoid paying the gains tax, which would substantially reduce the amount of cash that you have to buy the next property. The fully tax deferred exchange is like getting an interest-free loan from the government for the taxes you would have otherwise paid, but there is no repayment requirement.
Wise 1031 Exchange Investment Strategy
To evaluate how you would benefit from a 1031 exchange, consider the steps that every investor should take in forming a wise investment strategy:
- Forecast your Net Sale Price: This is your probable sale price less your closing costs.
- Identify your Adjusted Cost Basis: Get it from your CPA.
- Identify Taxable Gain: Net Sale Price – Adjusted Cost Basis = Taxable Gain.
Divide Taxable Gain into two parts: (1) accrued depreciation taken; and (2) the remainder is taxed as long-term capital gains.
Tax rates for each part:
Federal Rate 25% + Oregon Rate 9% = Total Rate 34%
Long Term Gain
Federal Rate 20% + Oregon Rate 9% = Total Rate 29%
- Identify Tax Consequence: Calculate the two tax amounts owed, add them together, then ask yourself this question: How much of my net equity will remain after paying the tax on gain? If your answer is “not enough,” then you have identified the need for completing a 1031 into the next property.
Every real estate investor should understand the 1031 exchange option. It’s a sound investment strategy with many benefits, but there are rules to follow. If you need help, contact me at 541-485-8100.